Month: November 2014

Over the past few weeks, India’s minister for power, coal and renewables, Mr. Piyush Goyal has publicly stated on several occasions that he envisions India to have 100 GW of solar capacity by 2022. This is very ambitious. For this target to be achieved, India would soon have to start ramping up solar capacity at a pace similar to that of China, which plans to add another 40 GW in the next three years (avg. 13-14 GW per year) to reach its target of 70 GW by 2017. To put it into perspective: China’s current installed solar capacity is approximately ten times that of India and, per capita, China’s power consumption is around five times that of India.

 A drastic upward revision of India’s solar target makes sense.

The speedy developments in the solar market have made the current 20 GW target by 2022 seem unambitious.

100 GW in the next 10 years will be a stretch, but can be achieved

Image source: businessinsider.com

In India, the 100 GW plan is still under deliberation, there is, as yet, no specific road map nor has it been made an official target. Already under the previous government, the Prime Minister’s Office (PMO), led by Dr. Manmohan Singh, had asked the Ministry for New and Renewable Energy (MNRE) to increase the target to 100 GW. However, at that time, the MNRE suggested that the 100 GW target should be set for a later date, perhaps, somewhere around 2027. Last year’s discussions didn’t really go anywhere and then the May elections brought in the new government.

 In our views, a drastic upward revision of a solar target makes sense. Even the 20 GW target looked very ambitious for India when it was announced in 2009. Because the global and Indian solar market developed so rapidly, it now seems quite feasible. BRIDGE TO INDIA actually believes that achieving 100 GW by 2022 is possible. We have shown how it can be done in our recent publication, “Beehives or Elephants: How should India drive its solar transformation?”

 Here are some reasons why the Indian solar story has picked up markedly: the new government has gone out of its way to revoke the anti-dumping duties (refer); a solar parks policy has been announced (refer), the central government portion of the NSM phase II has been ramped up from 3.6 to 15 GW (refer); the World Bank has committed to financing a 750 MW ultra-mega solar project (refer); the US-EXIM bank has signed an MoU with IREDA for USD 1 bn to finance solar equipment and services (refer); the German lender KfW is considering a EUR 1 bn loan to solar rooftop projects; the government is working on a comprehensive Renewable Energy Bill (refer), a rooftop solar policy and a revision of the Electricity Act 2003; the Prime Minister is taking a personal interest in making the renewable energy investor summit in February 2015 a success (refer).

 100 GW is still a very ambitious target and a lot of structural changes would be required in the overall power sector in the country for this to work. If these structural changes can be made, BRIDGE TO INDIA recommends that the government set annual targets of 5 – 7 GW for the next couple of years. The targets can then be ramped up to 12-15 GW per year by structurally opening up the parity-driven, distributed solar market.

India under Modi’s regime is being deliberated as a preferred destination for solar investments from rest of the world. An upcoming mega exhibition is going to be held in Delhi in February, to facilitate the international investment in India, “RE Invest Summit” (link). Though solar makes sense in India, but the question still remains that when would it be a reality? Besides the policy support, the government should highlight the importance of a self-sustaining market place. BRIDGE TO INDIA believes that the following are the stepping stones to make the shift towards solar feasible in India.

Cost reduction in solar should be the prime focus & to be supported by accessible information on the industry

Build strong financing environment backed by robust researches in solar applications and ample entrepreneurship opportunities

India needs to see more of distributed markets in solar

Image source: mugdhasays.blogspot.com

Focus all efforts on lowering the cost of solar: It means that there should be no domestic manufacturing protection and no duties and tariffs on solar equipment or parts thereof. The Indian power consumer and the Indian tax payer will benefit from the lowest cost. The market will be a very scalable, parity driven market, in which solar competes with other sources of power (grid, diesel) on price and availability. Once the market is ramped up from the current 3 GW to e.g. 20-50 GW, manufacturing in India will follow naturally and competitively (at scale). If, in addition to removing limitations, the government wants to actively push down the cost of solar, it should not do so through direct capital subsidies and tax benefits, which are prone to misuse and are thus often counterproductive. Instead, the government should focus on reducing the lending cost – either through direct loan subsidies or through reducing the risk (see next point). Lowering the cost of debt is the strongest lever for reducing the cost of solar.

Provide excellent market information: Despite the best efforts of a number of industry stakeholders, including governments and companies like us, this is still insufficient. The more transparent and easily accessible information is, on e.g. policies, land acquisition, debt conditions and options, investment (perhaps a market place?), generation of existing plants, technology options, etc., the more competition and professionalism will drive the market.

Build a stronger financing environment through reducing risks: There are two key risks at present: (1) The strength of the off-take (PPA). This, in turn, is related to the fundamental questions of who buys the solar power (bankability)?, for what reason (strategic alignment of interests)?, and at what cost (is it sustainable/attractive?). These points are particularly important in India, because of the limited enforceability of contracts. (2) Policy uncertainty around grid charges: Charges such as cross-subsidy charges, transmission losses, wheeling and banking charges, etc. can be changed potentially every year. They have a strong impact on the profitability of a project and their unpredictability is of great concern. Behind this is the larger question: what will be the future rules governing the Indian grid?

Strengthen R&D in India: If India will be one of the leading solar markets, it should also become a knowledge and technology leader. So far there are very few investments by Indian companies into solar R&D and there is nothing comparable to the National Energy Research Lab in the US or the Fraunhofer Institutes in Germany. It would be wrong to spend research budgets on making better cells and modules, as this would require a huge amount of catching up with China and Taiwan. It would be much easier for India to ask leading cell and module manufacturers to set up shop in India once the market has gained a certain size. (Also: manufacturing is not where employment is generated. It is a highly automated process.) India’s edge could be in solar applications. It could become the most innovative place for developing the solutions the country needs: hybridization of solar with storage, diesel gen-sets and the grid; smart grid and metering technologies at the distributed level; new online and offline solar business models. For that to happen, India needs to put together the challenges (of which there are plenty), the industry (many are already in India), the research, educational and training institutions (starting) and a vibrant, early-stage financing network (mostly lacking).

Encourage entrepreneurship and international investment: In the 1990’s India has shifted from a state-managed economy to a semi-open economy, which in the infrastructure and energy business, helped especially large, Indian companies grow very rapidly. It is time to open up the market entirely: to entrepreneurs and to international investors. This requires – in a very general way – a simplification of procedures, such as company regulations, accounting and taxation regulations and financial regulations. Also, the government could set up highly service-oriented offices across the country to help entrepreneurs and investors. Taxation is another key lever. Accelerated depreciation benefits, for instance, hugely favor existing conglomerate businesses over professional, financial investors and start-ups (why not make them tradable?). On the other hand, more leeway in adjusting early losses against later profits would help the latter

Encourage the distributed solar market: So far, solar in India has seen mostly utility-scale infrastructure projects and current policies point in the direction of more and larger plants. That is fine. However, solar is also ideally suited as a distributed, consumer technology to power anything from factories to households, irrigation pumps, telecom towers, water purifiers, mobile chargers or lights. This market could grow in a more stable, sustainable way than the infrastructure market, because it would not hit roadblocks such as land availability, grid access and local grid imbalances. Also, once the market is operational, new capacity could be added at a much faster rate, because it does not require allocation processes and policies. Additionally, the distributed solar market can make a real dent into India’s diesel consumption from gen-sets. The new net-metering policies are a step in the right direction. However, to take off, consumer finance solutions (such as equal monthly installments), certifications for suppliers to improve product quality and a revoking of existing malfunctioning subsidy schemes are required.

Contributed by Dr. Tobias Engelmeier, Founder and Director, BRIDGE TO INDIA

The Indian government clearly understands the impact and importance of low cost finance for the solar sector in the country and has taken up efforts to woo international institutional capital to the sector. Latest step in this direction is a Memorandum of Understanding (MoU) between US-EXIM and IREDA for a financing support of up to USD 1 billion (INR 61 billion) for made-in-America renewable energy goods and services (refer). This MoU is expected to be signed next week at the India-U.S. Technology Summit.

 Steps are being taken by the government to enhance access to financing and certification of off-grid technology

Multi-pronged approach to attract institutional capital to the solar sector is a welcome step

BRIDGE TO INDIA believes that the government should put additional effort towards ensuring more of private sector participation

Image source: Theenergycollective.com

Apart from this, the World Bank is already collaborating with the Solar Energy Corporation of India (SECI) for financing an ultra-mega solar project in Madhya Pradesh. The government hopes that due to the low cost of financing and the large scale of the project, there will be little or no need for providing any additional viability gap funding.

 For decentralized generation, the government is seeking a loan of EUR 1 billion (INR 77 billion) from the German development bank, KfW (refer). If approved, this fund might be used for a proposed 1.5 GW rooftop solar plan. The government is still trying to formalize the modalities of this.

 For off-grid projects and rural electrification, the US government has launched the Off-Grid Alliance. This program is expected to enhance access to financing and the certification of off-grid technology. Other similar efforts with regards to off-grid solar are expected to be taken up by the government in the future.

 This multi-pronged approach to attract institutional capital to the sector is a welcome step. However, as these are all work in progress, the impact of these efforts is only expected to start bringing results towards the latter half of 2015.Due to the involvement of developmental capital and sovereign guarantees, some of these proposals lean towards a larger role for public sector. BRIDGE TO INDIA believes that the government should put additional effort towards ensuring that these mechanisms allow as much private sector participation as possible.

Uttarakhand has opened the financial bid for a 30 MW tender which was floated in August’14. Despite the projects lacking scale advantage, Redwood projects has quoted a highly aggressive bid of INR 6.85/kWh for a 1 MW project. This bid is the lowest and is INR 0.71/kWh below the next bid. Overall, the median winning bid is INR 7.75/kWh, which is 12% higher than the median winning bids in Karnataka.[1]

The median winning bid of INR 7.75/kWh would yield equity IRR of over 14%

Over 80% of the projects will be located in Haridwar district

Over 50% of selected projects have a capacity of only 1 MW

In total, eleven bids were selected under this tender with cumulative capacity of 29.4 MW. The capacity of most of these projects is small. Among the selected bidders, only three projects have capacities of over 2 MW with only one project of more than 5 MW. Six bids (54% of total bids) have a capacity of only 1 MW. Major solar project developers such as Acme, Azure, Sun Edison, Welspun and Renew have not participated, presumably owing to the small size of the tender and projects.

Figure 1: Details of the winning bids

Uttarakhand, located in North of India, is hilly and has comparatively low irradiation. Only the Hardiwar district receives decent irradiation and has consequently attracted nine of eleven projects with a capacity of 23.5 MW (80%). Only the two projects of Uttarakhand Jal Vidyut Nigam (UJVN) will be installed in Dehradun.

Figure 2: Global horizontal irradiation map of India[2]

The lowest bid has been quoted by Redwood Projects at INR 6.85/kWh. Given that the lowest bid at the recently announced Karnataka tender (much larger size, better irradiation, lower land cost) was INR 6.71/kWh, this is highly aggressive. We doubt that it can be a profitable project. As per the industry sources, the land price in Uttarakhand is ca. INR 1-1.5 m/acre (in Karnataka it is ca. 400,000-500,000/acre). The next higher bid in Uttarakhand is INR 7.56/kWh and falls in the realistic range.

The median winning bid in Uttarakhand is INR 7.75/kWh. This is 12% higher than the median bid in Karnataka of INR 6.94/kWh.[3] Since the project sizes are small, we believe that the turnkey EPC price would be INR 63 m/MW[4]. Adding land, transmission infrastructure, financial cost during construction and other commissioning costs, the project cost will be ca. INR 72 m/MW. The operation and maintenance cost of small projects will also be higher than for large projects on a per MW basis. These projects will also likely be charged higher interest rates. At a debt cost of 13% and a 30:70 debt equity ratio, the median tariff of INR 7.75/kWh could thereby achieve a modest equity IRR of over 14%.

[2] NREL website, http://goo.gl/rijg4v

[1] [3] Refer our weekly update, Karnataka and Andhra Pradesh allocate 1 GW solar PV projects, http://goo.gl/GiIGhm

[4] The price of INR 63 m/MW has been calculated by considering 1.1 MW DC capacity and 1 MW AC capacity for project size of over 1 MW.

Mudit Jain is a Consultant at BRIDGE TO INDIA

[2] NREL website, http://goo.gl/rijg4v

[1] Refer our weekly update, Karnataka and Andhra Pradesh allocate 1 GW solar PV projects, http://goo.gl/GiIGhm

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Last week, the Ministry of New and Renewable Energy (MNRE) announced revised subsidy benchmarks for various off-grid and decentralized solar applications (refer). The subsidy amounts have been fixed in absolute Rupee terms instead of as percentage of capital cost. BRIDGE TO INDIA welcomes this change as it brings more transparency into the process.

Revised subsidy benchmarks announced by MNRE, fails to address the critical issue of delay in subsidy disbursement

BRIDGE TO INDIA agrees that discontinuation of subsidy mechanism might be a better step

Better incentive mechanisms to ensure quality of installations, which is plant performance linked could be more effective

Image source: dwih.in

However, the core issue of unavailability of subsidy funds is still unresolved. The minister indicated that some funds may be released by December’14. This is over and above the funds released for 25 MW of rooftop solar in August 2014 (refer). However, the amount is far too small in comparison to the demand. All new funds released are allocated to servicing the backlog of project applications.

According to a BRIDGE TO INDIA analysis, less than 15% of the installed rooftop solar capacity in India has been able to avail capital subsidy (around 40 MW out of 285 MW – refer to our upcoming “India Solar Rooftop Map”, to be published on the 18th of November’14). Since the subsidy scheme covers only a fraction of the market demand – and that without any discernible rationale, it creates investment and business insecurity, indecision at the customer end and inefficiency in public expenditure (read more to know how a large part of the disbursed subsidy does not even reach the end customer).

Even though it may sound counter-intuitive to outsiders, most solar industry players in India have long been asking MNRE to scrap the subsidy mechanism altogether. BRIDGE TO INDIA agrees that such a step would be overall positive for the market. Our analysis shows that non-subsidized grid parity is already the single largest driver for rooftop solar market growth in the country. BRIDGE TO INDIA projects that even without any government incentives, the Indian rooftop solar market is poised to reach 1.5 GW of cumulative installed capacity by 2018.

However, we suggest better incentive mechanisms in view of the multiple significant advantages of distributed solar from an economic, environmental and social perspective – to ensure quality of installations, a plant performance linked incentive such as a generation based incentive (GBI) can be considered. Also, MNRE could revamp the accelerated depreciation benefit by decoupling the tax incentive from investment in the same way that, say a carbon credit or a renewable energy certificate can be traded independently of the power output. Then, the tax benefit could be generated by one party (say, a professional rooftop investor) and sold to another party that wants to use it to reduce its tax burden. This approach has been very successful in the US. It helps transform the market from one driven by one-off investors into one driven by institutional capital, where professional approach, competition and reasonable return expectations help make solar power a scalable opportunity and a mainstream choice for end-customers.

We believe that India could easily add 100 GW of solar power in the next ten years.[1] Such a capacity addition would likely be divided into different segments: small rooftop (solar bees), large rooftop (solar pigeons), utility scale projects (solar horses) and ultra-mega scale projects (solar elephants). Each segment has implementation challenges. We believe that solar horses would face least hurdles because of the existing execution experience and manageable size. Solar bees will face most hurdles because their implementation at scale requires the development of a new market place. For further details, please refer to our ‘India Solar Decision Brief’ titled “India’s Solar Transformation: Beehives vs Elephants” (online downloadable version available here).

Solar horses have relatively fewer challenges due to a good track record and existing industry ecosystem

Solar bees have most challenges; the largest hurdle is financing

For very large solar plants, grid infrastructure will be the key challenge

The implementation challenges vary across the four scenarios. Solar horses and solar pigeons are relatively easy to implement as compared to solar bees and solar elephants.

Figure 1: Comparison of implementation challenges across the four scenarios

The challenges in solar project implementation can be broken down into four broad categories – financing, space availability, industry ecosystem and infrastructure.

Financing challenges are a common thread across all four scenarios. To a large extent, these challenges pertain to commercial banks playing a more active role and providing more easy access to loans. The process of obtaining financing, particularly for small rooftop systems needs to become as hassle free as car or personal loans. With the central government targeting 15 GW by 2019, non-recourse financing needs to be made more widely available.

Land/space is an issue at both ends of the spectrum. On residential rooftops, space is limited, especially in densely populated cities (just think of apartment buildings). The sheer amount of land needed for an ultra-mega scale plant makes the process of acquiring it challenging, as it will likely involve multiple sellers and can encourage local land speculation. Delays in land acquisition often result in cost overruns, capable of single handedly derailing a project. In the middle – in the large rooftop and utility scale scenario – land/ space is comparatively less difficult to come by.

Currently, the Indian solar landscape already has a healthy ecosystem in place for utility scale projects. However, the space for small rooftop and large rooftop systems is fragmented and disorganized. For these kinds of projects to really take off, the market needs to become more organized with standardized, ready for installation solutions (for the large rooftop market) or “kits” (for the small rooftop market). In the case of ultra-mega scale projects, the ecosystem for solar will be developed quickly, based on the ecosystem of other large-scale infrastructure projects.

Grid integration challenges will play a critical role once solar become more prominent in India’s energy mix. Challenges such as energy balancing, demand forecasting and weather forecasting are common to all four scenarios. Detailed forecasting and connectivity standards are fairly easy and inexpensive to implement. They are also required early on. For ultra-mega scale projects, with increasing renewable penetration levels, more costly and complex changes are required in the ‘hardware’ of the energy system. They include new infrastructure projects around transmission and balancing power generation. In the first three scenarios balancing is not as serious a concern as the projects would be spread out all over India, across states and there will be some degree of geographical balancing. However, in the fourth scenario local energy balancing is probably required early on.

Mudit Jain is a Consultant at BRIDGE TO INDIA

[1] Refer to our blog, “Realizable solar potential in India is 110 GW to 144 GW by 2024”, http://bit.ly/1zD0znN

Since the 1950’s, the world has witnessed (and recorded) global warming at an unprecedented speed. This radical change in the climatic system has been attributed to massive emissions of CO2 and other greenhouse gases, due to industrialization and related, modern lifestyles. While there have been debates in the past over the reality and validity of global warming, there is now an overwhelming scientific consensus that it happens, that it is man-made and that it affects the climate in potentially very damaging ways. Unless the carbon juggernaut is stopped and rolled back in time, we may soon pass a point of no return. In its fifth report on climate change, the Intergovernmental Panel on Climate Change (IPCC) sets the point of no return at 16 years from now1. One of the solutions is accelerated deployment of renewables. Today, renewable energy already accounts for over 20% of power generation worldwide as of 2013. Renewables are still, however, underutilized.

The key to avoid a climate disaster is to act quickly and decisively through a global transition in the way we gather, transport and consumer energy

Global energy needs are increasing and carbon curtailment won’t be possible without providing alternative sources of energy

Renewables are a technologically and economically mature option

Source: ZME Science – http://bit.ly/1oiWC2B

Climate scientists have been able to define the maximum amount of CO2 we can release in the atmosphere to keep temperature rise at 2° Celsius and thus prevent the most dangerous effects of climate change. However, in November 2012, the International Energy Agency (IEA) and the World Bank stated that on our current trajectory, we are headed towards a potentially catastrophic 3.6-4° C increase in global temperatures2. It is also estimated that the carbon that has already been emitted will lead to a rise of 0.8° C in average global temperatures. These changes in the climate inevitably come with a human cost. Around 5 million lives are lost due to climate change every year and by 2030, the figures could ramp up to a total of 100 million.

Renewable energy offers the perfect solution to meeting our energy needs without endangering the climate and the environment. For instance, if we look at the carbon footprint of a solar panel, taking into account its entire lifecycle, CO2 emissions would be around 30g/kWh on average. Compared with our current fossil fuel based energy sources whose carbon footprint stands at around 450-500g/kWh.

Over the past few years, great strides have been taken in deploying renewables and creating a robust market for them. Due to these efforts and breakthroughs in R&D, renewable energy costs have entered into a steep descent.

Technologies like solar are very easy and fast to deploy. This comes with added benefits of job creations. A report by Greenpeace shows that renewable energy could employ up to 8 million people by 2020, compared to coal industry’s 2.8 million. In our recent report “Beehives and Elephants”, we estimate that 100 GW of solar in India could generate 629,000 jobs over the next ten years3.

India has been one of the first movers in betting on renewables. However it is still ranked only 12th globally in terms of installed solar capacity. Given the abundant irradiation it possesses, India needs to scale up massively to live up to its true potential. There are currently efforts being made to revamp the renewable landscape in India under the new government with expansion in renewable energy targets and a revamp in the national solar mission4. By local necessity (of getting cheap, plentiful energy quickly) as well as by global necessity (preventing climate change which would be particularly harmful to India), India could emerge as a leader in the global energy transition.

 [1] http://bit.ly/1p8ZQ8q

[2] IEA (2012c). World Energy Outlook 2012. 12 November 2012.

http://www.worldenergyoutlook.org/publications/weo-2012/#d.en.26099

World Bank (2012a). Turn down the Heat. November 2012.

http://climatechange.worldbank.org/sites/default/files/Turn_Down_the_heat_

Why_a_4_degree_centrigrade_warmer_world_must_be_avoided.pdf

[3] Read the full report here – http://bit.ly/1uZy2BY

[4] Read our weekly newsletter on the Renewable Energy Act – http://bit.ly/1x4TCra

Shikhin Mehrotra is an Analyst-Consulting at BRIDGE TO INDIA

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Last week, Karnataka opened financial bids for 500 MW solar PV projects, just a few days after financial bids for another 500 MW solar PV projects were opened in Andhra Pradesh. The bidding process in both the states was based on reverse bidding: on the basis of flat tariff in Karnataka; 3% escalation per year until the 10th year in Andhra Pradesh. The median winning bid in Karnataka is INR 6.94/kWh (USD 0.12/kWh). The levelized (adjusted for escalation) median winning bid in Andhra Pradesh is INR 6.70/kWh (USD 0.11/kWh) (refer).

 The opportunities in both the states are quite comparable

Both First Solar and Acme who aggressively bid in Andhra Pradesh, did not participate in the Karnataka bids

Overall solar tariffs in India seem to have stabilized between INR 6/kWh and INR 7/kWh

The tariff difference is only 3.6%. The opportunities are quite comparable. Project sizes are in the same range and execution timelines are similar. Payment risks are manageable. The PPAs are well structured and the distribution companies in Karnataka and Andhra Pradesh have similar financial ratings. The preferred districts in each state, where most projects are to be built, have similar solar irradiation levels of around 5.3 kWh/m2/day. Land prices in Karnataka and Andhra Pradesh are also comparable and range between INR 400,000-500,000/acre. However, the land acquisition process in Karnataka is more tedious.

 In Andhra Pradesh, aggressive bids by First Solar and Acme helped in bringing down the median tariffs. First Solar has quoted INR 5.25/kWh (levelized tariff INR 6/kWh) and INR 5.35/kWh (levelized tariff INR 6.11/kWh). Acme has quoted INR 5.64/kWh (levelized tariff INR 6.45/kWh) and INR 5.72/kWh (levelized tariff INR 6.53/kWh). These four bids amount to 200 MW. Both First Solar and Acme did not participate in Karnataka.

 Overall solar tariffs in India seem to have stabilized between INR 6/kWh and INR 7/kWh. With a significant number of new project opportunities across the country (especially the 3 GW planned allocation under the NSM), the competitive pressure on tariffs is likely to ease off. At the same time, average project sizes are increasing and PPAs are better structured. This bodes well for professional developers, EPCs and equipment suppliers who had to work on wafer thin margins in the past.